Mexico Sets First Fixed Rates With Inflation Receding: Mortgages

Mexico's Central Bank Governor Agustin Carstens
Mexico’s central bank board, led by Governor Agustin Carstens left the overnight rate unchanged at a record low of 4.5 percent for the 25th straight meeting last month. Photographer: Susana Gonzalez/Bloomberg

Mexico’s largest mortgage provider plans to offer home buyers fixed-rate loans for the first time, as the two-decade long inflationary hangover from the country’s Tequila Crisis fades.

A legal overhaul will let Mexicans who finance their homes with state-controlled Infonavit, the company founded in 1972 to give workers access to home financing, get the 30-year mortgages for the first time as soon as June. The lender, which has made about 4.4 million loans since 2001, also plans to issue mortgage-backed securities in pesos next year to match income with obligations, the first such sales since 2004.

President Felipe Calderon’s government is taking advantage of the second-lowest inflation rate among major Latin American economies to start providing the loans as it moves to tame a housing shortage afflicting 8.9 million families. Inflation has declined to 3.73 percent from 52 percent in 1995 when the peso’s devaluation sparked capital outflows across the region.

It’s “a much more mature country” than during the “disaster” of The Tequila Crisis, said Alan Boyce, chief executive officer of Absalon Project, which is partially backed by billionaire financier George Soros to promote the Danish mortgage model globally, including Mexico. The peso’s devaluation in December 1994 led to investors pulling money from countries throughout Latin America, an event that came to be known as the Tequila Crisis because of its origin in Mexico.

Mexico Versus Brazil

The real interest rate, which is the benchmark rate minus inflation, of 0.77 percent in Mexico compares with 3.76 percent in Brazil, the region’s biggest economy, where President Dilma Rousseff’s administration is seeking to address a shortage of 6.3 million homes.

“Mexico is in a better position” than others as “it’s very hard to have a mortgage market when your real interest rates are so high,” Boyce said by telephone from Westlake Village, California.

Mexico’s central bank board, led by Governor Agustin Carstens left the overnight rate unchanged at a record low of 4.5 percent for the 25th straight meeting last month. “If current favorable conditions in the inflation outlook are consolidated, it may be advisable to adjust downward the benchmark interest rate,” according to the minutes of the meeting published on March 30.

Protecting Banks

Lenders in Mexico, which targets inflation at 3 percent, plus or minus one percentage point, turned to loans in inflation-linked units in the 1990s for protection against spiking consumer prices, according to Gabriel Casillas, chief Mexico economist at JPMorgan Chase & Co. More than 99 percent of the 72.5 billion pesos ($5.5 billion) in outstanding mortgage-backed securities, known as Cedevis, that Infonavit has sold are denominated in an inflation-linked currency known as an udi.

“The use of udis wasn’t to protect workers rather to protect the lenders, the banks,” Casillas said by phone from Mexico City. “At the end of the day a loan in pesos with a fixed-rate is much better.”

Fixed-rate loans from Infonavit represent “an advance in the credibility in Banco de Mexico,” said Casillas.

Investors’ inflation estimates, as measured by the gap between yields on fixed-rate debt and notes linked to consumer prices, fell to the lowest level since at least May 2009 after the central bank said it’s considering a rate reduction in the minutes of its March meeting. The gap, known as the break-even rate, declined to 2.92 percentage points on April 11, before increasing to 2.98 percentage points as of 12:24 p.m. in Mexico City. The so-called break-even rate in Brazil is 5.61 percentage points.

Biggest Gain

The peso fell 0.8 percent today to 13.2034 per dollar, paring its gain this year to 5.5 percent. The increase is still the biggest among the 16 most-traded currencies tracked by Bloomberg.

Infonavit’s financing climbed by a record 2.57 million loans under outgoing President Calderon, putting pressure on candidates vying to replace him to expand the programs further.

Infonavit said on Jan. 5 it granted a record 501,292 home loans last year. Demand for fixed-rate mortgages has been increasing, according to Enrique Aranda Vargas, director of planning and strategic initiatives at Infonavit.

“There’s no doubt that these policies are here to stay,” Eduardo Torres, an economist tracking the real-estate industry for Banco Bilbao Vizcaya Argentaria unit BBVA Bancomer SA, said by phone from Mexico City. “It’s easier to explain an instrument denominated in pesos than one that’s based on an index that changes with inflation.”

Foreign Investment

The peso-denominated mortgage-backed securities Infonavit plans to sell next year will be benchmarked to Mexican fixed-rate bonds known as Mbonos. Foreigners hold about 44 percent of Mbonos, according to central bank data, while global investors haven’t bought Cedevis directly in the primary market, according to the lender.

Foreign investment in the securities is likely to increase after Infonavit begins issuing them in pesos, according to Jorge Galindo, the chief executive officer of Hipotecaria Total, a mortgage servicing company focused on securitization that Absalon set up whose backers include Soros and the Mexican government.

The company, known as HiTo, has been advising Infonavit on issuing the peso-denominated securities. Absalon is also backed by Danish financial processing firm VP Securities A/S.

“The peso-denominated security is much, much more liquid than the udi-denominated securities,” Galindo said by phone from Mexico City. “When they open the securities in pesos, I’m expecting to see more liquidity.”

Infonavit sold almost 14 billion pesos of the mortgage-backed securities last year.

Biggest Growth Opportunities

Selling the securities in pesos may “increase a segment of investors that at this moment don’t feel attracted to our product denominated in minimum wage units,” Infonavit’s Aranda Vargas said in a telephone interview from Mexico City.

Mexican banks’ outstanding housing loans increased 16 percent in January, from a year earlier, according to the country’s National Banking and Securities Commission.

Banco Santander SA’s Mexican unit is eyeing mortgages as one of this year’s biggest growth opportunities, Chief Executive Officer Marcos Martinez said in an interview on March 23.

In a speech last month, Calderon touted his administration’s legacy of boosting homeownership among Mexican workers and said Infonavit had become synonymous with “well-being” and “progress” for the families of Mexican workers.

‘Measured Return’

“The housing policy will be hard to reverse with all that it’s accomplished,” said Luis Rodriguez, an equity analyst with Casa de Bolsa Finamex SAB, in a telephone interview from Guadalajara, Mexico. “They have to keep promoting these instruments, the securitization of mortgage portfolios. There’s a great market for these instruments.”

Infonavit is authorized to issue 10 billion pesos in mortgage-backed securities this year and plans to sell a similar amount annually through 2017, according to Jorge Marquez, coordinator for Infonavit’s Cedevis program.

Infonavit sold almost 5 billion pesos of Cedevis at a yield of 4.5 percent in February that were benchmarked to government inflation-linked bonds known as Udibonos, according to the lender.

Ivan Reguera, director of investment at Afore Coppel SA, a Mexican pension that has about 50 billion pesos in assets under management, said his fund doesn’t buy Infonavit’s mortgage-backed securities because they offer “a measured return” relative to their duration.

Mexican pension funds known as Afores, Mexico’s largest institutional investors, hold about 40 percent of Cedevis, according to Infonavit.

Presidential Candidates

“There’s an exposure that’s prolonged with these types of assets,” Reguera said by phone. For the maturities to be attractive there “would have to be a very significant change in terms of the maturities and under a different structure that could allow for a different type of return,” said Reguera.

JPMorgan’s Casillas said it’s unlikely that whoever wins July’s presidential election will make large scale changes at Infonavit.

Mexican presidential candidate Enrique Pena Nieto, of the Institutional Revolutionary Party, is leading other rivals to replace Calderon ahead of the July poll with 40.2 percent of voter support, according to the results of a survey from Consulta Mitofsky, a Mexican polling company, released April 17.

Josefina Vazquez Mota, from Calderon’s ruling National Action Party, had 22.6 percent support while Andres Manuel Lopez Obrador, from the Party of the Democratic Revolution, had 17.3 percent, in the poll.

‘Reactivate the Economy’

The ruling party and Lopez Obrador’s campaign have proposed programs aimed at cutting the housing deficit, which both said may be higher than the projection of 8.9 million families. A Pena Nieto spokesman declined to comment.

“There’s a lot of work ahead of us,” said Daniel Hernandez, message coordinator for Vazquez Mota, in a telephone interview from campaign headquarters in Mexico City.

The Lopez Obrador campaign said building homes is also part of its plan to create jobs and “reactivate the economy,” according to congresswoman Laura Itzel Castillo, a campaign coordinator.

“The macro-economic conditions in recent years allow us to offer loans in pesos,” Infonavit’s Aranda Vargas said.

“Independent of what party wins the election, we think that we can maintain the products and the trajectory that have been around since the current director came aboard,” he said. “This is a maturation of the market.”

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